A sector to buy into now, one for gamblers, and one to avoid

Results have been pouring in from sectors all across the FTSE. So it's a good time to look at which ones you should invest in - or avoid - now.

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It's been a busy week for corporate UK. Around a quarter of the UK's biggest companies have made some sort of trading announcement in the last four days.

Yesterday was particularly hectic. Results came in from oil companies, drug companies, utilities, retailers covering practically every sector in the FTSE 100.

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So it seems the ideal time to have a look at three of those sectors one you should buy, one to look at if you're feeling intrepid, and one you should definitely avoid...

Starting the day on a high note, oil heavyweight Royal Dutch Shell saw profits comfortably beat analysts' estimates. Second quarter net income rose 40% to $7.3bn. That was despite production losses caused by rebel attacks on pipelines in Nigeria.

The same thing happened with BP earlier in the week despite disappointing production and rising costs, the high oil price saw profits meet the top end of analysts' hopes.

There's a valuable lesson to be learned here. When oil prices rise, oil companies make more money than when they are low. Perhaps any analysts reading should take note, and then they won't be quite as surprised when profits keep rising.

So if you believe as we do, that high oil prices are here to stay, then the oil sector still looks like a good bet, particularly as both BP and Shell are still trading at forward p/es that are barely into double figures.

A more risky proposition is the drugs sector. AstraZeneca and GlaxoSmithKline both posted solid results this week.

Risky? It's true that pharmaceuticals are often seen as a defensive sector. People argue that consumers always need medicines, regardless of economic conditions. There's also the argument that drug manufacturers have time on their side. People in developed countries are living longer than ever before. They expect to be able to maintain their quality of life throughout that time and are willing and able to pay to do so.

These aren't unreasonable points but they do ignore a vital catch. The demand might be there but a company has to come up with the drugs in the first place. And with copycat products continually being developed, and patents challenged, pharmaceutical companies can't just create one blockbuster and then sit on their laurels.

No one can predict which products will be successful even once a drug reaches Phase III testing (the final stage of clinical trials before approval), it still has only a 50% - 60% chance of making it to market. And even if it makes it that far, it may not live up to sales expectations.

So clearly it's important to have a lot of drugs in the pipeline to give a company a better chance of landing a blockbuster. And as Giusep Demont at Bank Vontobel in Zurich said: "AstraZeneca's weakness is its relatively thin pipeline."

Should investors buy into GlaxoSmithKline instead? You could but better opportunities might lurk among the smaller firms in the sector. When the big companies start to run out of products, that can create opportunities for the smaller drug companies. AstraZeneca has recently gone on a spending spree which has benefited shareholders in smaller biotech firms including Cambridge Antibody.

So if you're going to invest in an inherently risky sector like pharmaceuticals, you might be better investing smaller sums in some of the smaller stocks. Sure, there's a higher chance of losing some (or all of your money). But the rewards can be far greater and with AstraZeneca planning to increase research spending to about 16% of sales, there could be more acquisitions to come.

Lastly, a sector to avoid. B&Q owner Kingfisher saw its shares rise 3% to 244.75p yesterday, on news that sales at stores open at least a year slipped 2.4% in the 11 weeks to July 15. That sounds pretty weak but analysts had expected a fall of 4.4%.

But we wouldn't go racing into the retail sector just yet. Although more recent statistics suggest that high street activity has been picking up, it's difficult to see how much of that is down to the "World Cup" effect, which meant higher sales of booze and fancy TVs.

One reason for our scepticism is an announcement from another FTSE 100 company, Centrica. The British Gas owner said it plans to hike gas bills by 12.4% and electricity bills by 9.4% from September.

The move is likely to cost it more customers, but the group has little choice but to take the hit British Gas reported record losses of £143m during the first six months of 2006 as wholesale gas prices soared.

All of the major energy companies have raised prices this year, and there are likely to be further hikes up ahead. Consumers are already feeling the squeeze credit card spending has actually fallen this year, down 3.5% in the first six months of the year, according to industry body Apacs. The continuing surge in domestic bills will just mean less money is available to spend on the high street and with unemployment rising and consumers already sitting on record levels of debt, the outlook for retail still looks bleak.

If you'd like more detailed information on specific stock picks within sectors, MoneyWeek writers James Ferguson and Paul Hill can help you with your investment picks. You can find out more about Paul here: Precision Guided Investments (/file/11989/expert-investment-advice-from-paul-hill-precision-guided-investments.html).

And you can see what MoneyWeek editor Merryn Somerset Webb has to say about James by clicking here: Model Investor (/file/6877/model-investor-the-new-investment-service-from-james-ferguson.html)

Turning to the global markets...

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The FTSE 100 rose 52 points to 5,929. Medical devices group Smith & Nephew was the top riser, up 7% to 423.75p as second-quarter results beat expectations. For a full market report, see: London market close (/file/15990/london-close-earnings-push-footsie-higher.html)

Over in continental Europe, the Paris Cac-40 rose 58 points to close at 5,001. The German Dax-30 gained 75 points to 5,659.

Across the Atlantic, US stocks fell back, despite solid earnings from oil giant Exxon Mobil. Fears over the housing market grew on news that sales of new homes fell 3% in June, while May's sales were also revised lower. The inventory of unsold homes on the market hit a new record of 566,000. The Dow Jones Industrial Average shed 2 points to close at 11,100, while the S&P 500 lost 5 points to 1,263. The tech-heavy Nasdaq fell 15 to 2,054.

Overnight in Asia, the Nikkei 225 climbed 163 points to 15,342, as Sony's quarterly profit beat analysts' hopes, and Canon raised its profit forecasts. Meanwhile, consumer price inflation rose for the eight month in a row in June, up 0.6% on last year. The number of jobs available per jobseeker also rose to a 14-year high of 1.08.

Oil prices rose in New York this morning, with crude trading at around $74.70 a barrel. Brent crude was higher too, at around $75.35 amid further export stoppages in Nigeria.

Meanwhile, spot gold was trading at around $632 an ounce after heading as high as $640.50 in earlier trading. Silver was lower, trading at around $11.29 an ounce.

And in the UK this morning, economic think-tank the National Institute for Economic and Social Research has again urged the Bank of England to raise interest rates. NIESR director Martin Weale said: 'There's little to be gained by delaying the rise until late in the year. Given that we have inflation staying above target and given rates are expected to rise I cannot see a strong case for waiting.'

And our two recommended articles for today...

The five 'Es' reshaping the world economy

- Daily Reckoning editor, Bill Bonner, recently gave a speech in Vancouver in which he outlined the five major trends which will have the greatest impact on the world economy and your investments in the years to come. To find out what these five 'Es' are, see: The five 'Es' reshaping the world economy


Why you should be worrying about US house prices

- The state of the US property market is key to the health of the global economy, say Andrew Selsby and John Robson of RH Asset Management. The US consumer relies on rising house prices to prop up their spending ability - in turn, companies around the world rely on US consumer spending. And that's why the latest batch of news on US housing is so concerning - to find out more, click here: Why you should be worrying about US house prices (/file/15989/why-you-should-be-worrying-about-us-house-prices.html)

John Stepek

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.